some legal remedy to prevent the raising of its rates. On the other hand, if it can be shown that the company's existing rates would not be remunerative if applied to the general service of the Second Ward, which the Urban company is under equal legal obligations with the Citizens company to render, and much more if it can be shown that even on the Urban company's present limited service its rates are unremunerative, it is hard to see how either the company itself or any of its consumers, in the absence of a specific statutory right, could successfully contest the commissioner's authority to increase the Urban rates. This question involves the larger question of the commissioner's power to establish rates for an area as distinguished from a company. So far as I know, this particular situation is without an exact precedent in the history of rate regulation. A somewhat similar question was presented to the United States Supreme Court in the so-called Minnesota Rate Cases,1 where the court held that the rates of favorably situated railroads could properly be reduced to a level which, if applied to a less favorably situated road in the same jurisdiction, would be confiscatory. In these cases, however, the court did not assume to fix uniform rates for a given territory, but merely upheld the rates prescribed by a state authority as to those particular roads upon which the rates so fixed would be remunerative. It may be urged that as long as neither the Urban company nor any of its consumers protests against the existing rates, and in fact both the company and all its consumers may be definitely opposed to an increase of the rates, it is not within the province of the commissioner to increase them. It may also be urged that unless the Urban company found its rates to be remunerative, it would be the first to wish to raise them, and if it did not, why should the commissioner interfere to prevent it from losing as much money as it wished to? The company made its venture on the basis of a cut-rate with the expectation of "picking off" enough large consumers to enable it to do a profitable business unburdened by the obligations of its competitors to supply a general service where small consumers predominate. It is often observed that after a large amount of capital has been invested in a particular enterprise and cannot be withdrawn, even though the operating revenues are insufficient to yield a fair return upon the investment, operation is continued so long as the revenues are sufficient to pay operating expenses, and pay any return at all on capital. To stop operation means a total loss of the investment, while to continue means only a partial loss and perhaps the hope of ultimately saving the entire capital. This explains why a company situated as the Urban company is may prefer to continue to charge an unremunerative rate, when the charging of a remunerative one might drive it out of business altogether. If the only parties involved in this case were the Urban company and its few consumers, the commissioner might be justified in leaving matters in statu quo. But this is not the case. The Citizens company with its large investment, and all of its 16,000 or 17,000 consumers in the Second Ward, are interested. Even the city at large is interested. Shall the rate-regulating power of the department be nullified as to the Second Ward by the denial of the commissioner's authority to compel a competing company with only nine consumers to charge a remunerative rate or a rate that, applied to general service in the district covered by the company's franchise, would be remunerative? Shall the special advantage now enjoyed by one manufacturing concern in a poorly developed section of the Second Ward of Queens compel us to change the whole theory of water rates applicable to all the business enterprises of a city of more than 5,000,000 people? Shall 1230 U. S., 352. we be compelled by the practices of the Urban company to permit the Citizens company to charge higher rates to 16,000 consumers than it otherwise would in order to be able to meet an unremunerative competitive rate in one corner of its franchise district? These questions answer themselves so far as common sense and good public policy are concerned, and it cannot be doubted that under the broad provisions of the charter, the commissioner has the legal right to raise the Urban company's rate for the purpose of establishing a uniform rate in the Second Ward. (3) The commissioner's authority to disregard special rate contracts. The third question relates to existing contracts between the two water companies and certain of their consumers. The Citizens company's special contracts are of relatively little importance as none of them has more than two years yet to run. But the Urban company's contract with the Nichols Copper Company is all important in this connection, both because it comprises almost the entire business of the Urban company and because it still has sixteen years to run. The control of special contracts previously entered into between public service corporations and some of their consumers has been a considerable factor in rate regulation in this country. Special contracts were the characteristic vehicles of rate discriminations in the days prior to the establishment of public service commissions. It is now well established in law that such private contracts are affected with a public interest and that they are subject to the exercise of the police power of the state. The law and the considerations of public policy on this point were exhaustively set forth by the late Hon. John M. Eshleman, then chairman of the Railroad Commission of California and one of the ablest commissioners in the country, in an opinion rendered in 1913 in the Matter of the application of Murray and Fletcher, in which certain private contracts were abrogated by the commission and it was ordered that the rates prescribed be "established as just and reasonable and the only rates to be charged by the applicants herein." The Wisconsin commission early in its career interpreted its powers as extending over private contracts entered into subsequent to the enactment of the public service law, but did not undertake to disturb contracts made prior to that time. This rule, though more conservative than the California rule, would amply sustain the commissioner's authority in this case to disregard the Urban company's contract with the Copper company, so far as it purports to fix rates, for it is conceded that the contract was entered into long subsequent to the enactment of section 472 of the charter. The right of a tribunal established by the legislature with authority to regulate rates to act without regard to the provisions of private rate contracts has been clearly upheld by the courts of Pennsylvania and Maryland in recent cases.2 The public service commissions and courts have gone so far as to hold that rates to private consumers established by franchise or contract between public service corporations and municipalities are subject to revision by the rate-regulating authorities of the state, unless it can be shown that the municipal authorities were expressly authorized by the legislature in unmistakable terms to enter into the contract in question. This view has been established in leading cases in Washington, Wisconsin and other states. The Milwaukee street railway fare case was taken to the United States Supreme Court and the principle was there sustained. In New York the 12 California Railroad Commission, 464. 2 255 Pa., 114; and Yeatman vs. Towers, 95 Atlantic Reporter, 158. 3153 Wisc., 592; 238 U. S., 174. public service commission for the first district took this view in the Bridge Operating Company Case, and was sustained by the Appellate Division, First Department, from whose decision no appeal was taken. In view of these cases it would seem to be clearly settled as a matter of law that agreements made by public service corporations affecting rates to private consumers, whether made with consumers themselves or with municipalities, are subordinate to the rate-fixing orders of the tribunals upon which the state confers its inherent rate-regulating powers. It would be little short of monstrous that a water company operating practically as a subsidiary to a large manufacturing plant, should be enabled to serve the special interests of this plant under authority of a public franchise and nevertheless keep itself free from public regulation. For these reasons it would appear that the commissioner may, in his discretion, disregard the water companies' special rate agreements with certain of their consumers, if this course is deemed to be necessary to avoid unfair discrimination. (d) Conclusions as to principles upon which rate regulation in the Second Ward should be based. This brings us back to the vital question as to what principles should be followed in establishing rates in the Second Ward primarily for the Citizens company and incidentally for the Urban company. The rate-fixing authority would hardly be justified in reducing rates so that they would yield less than six per cent on the fair present value of the property devoted to the public service unless it were necessary to do so either to bring the rates within the limits of reasonableness to the public, or to save the investment itself from destruction through competition or loss of business by other causes. So far as the Citizens company's rates themselves are concerned, they fall well within the rates charged for water in many other communities. I am of the opinion that if the Citizens company had an actual monopoly of the business of the Second Ward, but without any legal guaranty against competition, it would be fair and reasonable to allow it a seven per cent return upon its necessary investment, provided this would not require rates so high as to increase the dangers of actual competition. But, as a matter of fact, competition has already been encountered, and the company's revenues have been substantially decreased thereby. This loss cannot properly be made to fall upon the public or upon the company's existing consumers, if this would result in unreasonable rates. Therefore, if a uniform absolute rate is to be established for the future so that the company is protected from future loss due to underselling, it will be fair to fix this rate with two considerations in mind. In the first place, the rate should be high enough so that on the basis of an actual monopoly of service the company could earn seven per cent upon its necessary investment. In the second place, if rates uniform with those on the city service, or with those which the department expects to recommend for the city service in the near future, will not enable the Citizens company to earn seven per cent upon its necessary investment with the existing division of service between the two companies, the loss, at least in part, should be borne by the company as one of the misfortunes of competition. The uniform rate fixed for the Citizens company, in consideration of the rights of its consumers, the city's general rate policy and the company's right to a fair return upon its investment, should be made applicable to the Urban company as well, and in the case of both companies should be made to supersede all other rates now in force, whether general or special. 1153 App. Div., 129. CHAPTER XVIII SCHEDULE OF JUST AND REASONABLE RATES AND PRACTICES RECOMMENDED (a) Summary of gross revenues required by the Citizens company on different assumptions. From the estimates already made, the amount of gross revenues to be provided for annually for the Citizens company on account of domestic and business service in the Second Ward, including all classes of service other than general fire protection and hydrant service, will be as follows, according to the different conditions assumed: (1) On the basis of the property regarded as now necessary for the Second Ward service, including Stations No. 1 and No. 2, but excluding the Third Ward pipe line and Station No. 8; use of city main continued as at present; extensions ordered for 1916 completed; meters acquired; emergency gang and additional office force put on; Standard Oil service in First Ward transferred to city... (2) Same as (1) except on assumption of monopoly conditions in Second Ward (4) Same as (1) except that meters are not acquired. made. $313,923 322,683 335,683 297,523 291,523 (b) Analysis of company's present and prospective earnings at existing rates. We must now analyze the company's actual earnings and rates for the purpose of reaching an adjustment of the latter which will be fair and reasonable to the consumers and which, nevertheless, will produce the necessary earnings for the company. The company's gross revenues for the year ending November 1, 1915, were approximately as follows: Total, after adjustment of city hydrant rentals. Less earnings in Great Neck... Less city hydrant rentals. . Less receipts from Standard Oil Company in First Ward........ The figure $333,312 is made up approximately as follows: "Private" or "small" consumers, billed semi-annually, on metered service.... Private consumers in Ridgewood on frontage rates (107), billed annually or semi-annually, about.. Large consumers, billed monthly, metered service, 10-cent rate. Long Island Railroad Company, 7-cent rate.. National Enameling & Stamping Company, 72-cent rate. City of New York, public buildings, 10-cent rate.. Water for building purposes, etc., unmetered.. Total revenue from sale of water.. $392,470 17,988 $374,482 27,380 $347,102 13,790 $333,312 $281,977 1,621 13,072 3,527 4,217 6,056 7,459 $317,929 Net revenue from sale of taps, meters, curb stops, curb boxes, etc., in the $11,000 Sale of scrap iron and ashes... 800 Total revenues from operation in the Second Ward, exclusive of hydrant rentals. $329,729 3,583 $333,312 From the $329,729 of "revenues" from the Second Ward service exclusive of hydrant rentals, a certain amount should be deducted for uncollectible accounts. Mr. J. Edward Meyer estimates these at about $800 for each half year. For the purposes of this case, I shall assume that the actual collectible earnings for the Second Ward service for the year ending November 1, 1915, exclusive of hydrant rentals was $328,000. The estimated revenues on the basis of the old rates for the year beginning May 1, 1916, as compared with the actual revenues for the year ending November 1, 1915, ought to show the normal increase for one and one-half years. The company's total revenues from the Second Ward service, exclusive of hydrant rentals, have increased every year since the raising of the rates in 1905, except for the year 1913 just after the company lost the patronage of the Nichols Copper Company and certain other consumers through the competition of the Urban Water Supply Company. Even then, the Citizens company's revenues almost held their own. increases from year to year are shown in the following table: The TABLE 37-CITIZENS WATER SUPPLY COMPANY, GROWTH OF REVENUES FROM THE SECOND WARD SERVICE, EXCLUSIVE OF HYDRANT RENTALS, 1906 TO 1915 The figures used in the above table include miscellaneous revenues and revenues from the company's few consumers in Queens outside of the Second Ward, but this fact will not materially affect the rates of growth. It will be noticed that the increase in revenues has been very irregular, much more so than the increase in taps, but taking the ten years together we have an average annual rate of increase of 9.8 per cent in revenues and of 10.7 per cent in taps. I am of the opinion that under conditions now prevailing it would be very conservative to estimate the company's normal increase in revenues on the basis of unchanged rates at 6 per cent for the eighteen months period from November 1, 1915, to May 1, 1917. We may therefore assume for the purposes of rate-fixing that the existing rates |